Ban Algorithmic trading!

http://paul.kedrosky.com/archives/2010/05/duncan_niederau.html

Once again you prove your amazing ignorance of the markets. Algorithmic trading was not the issue - it was HIGH SPEED trading. You can do algorithmic trading that takes weeks to do a single trade, dummy.

argument fail on jason's part once again as well...he is showing HIS ignorance of the markets...

yes you can do algorithmic trading that takes weeks to do a single trade, but you cannot do high frequency trading w/out algos.

so riversider is not THAT far off

@jamba97 you already failed with EURO in 80s, and jason is right algo trading isn't the problem. High frequency is, algo trading is VERY generic term.

/fail

oh yea darky? show me where the euro traded below 80 cents post '85?

and while you're at it, explain to me how high frequency trading works without algos?

There was no euro before '99, and you still don't get basic concepts.

Answer this question, how do you trade without math?! Algo uses math, right? or its uses some god send blessings? High frequency trading is a subset of algo trading. So enlighten me, how's a subset of algo trading can be the algo trading?

Ban MATH!

Exactly. HUMANS do algorithmic trading ALL THE TIME without high speed trading, in many markets beyond the stock market. CDS trades often rely on algorithms...and then the trader or PM picks up a phone and a human CDS broker makes the trades.

Conversly, high speed trading by ETFs seem to have been part of the cause yesterday...and these do NOT rely on algorithms. You fricking morons.

http://www.marketwatch.com/story/etfs-etns-get-caught-up-in-trading-meltdown-2010-05-07?siteid=yhoof

In addition, your Schwab or E-trade online trades are gernally aggrogated through a high-speed computer trading program...not involving an algorithm. Just sheer stupidity.

bob420,

“Stand firm in your refusal to remain conscious during algebra. In real life, I assure you, there is no such thing as algebra.”

--Fran Lebowitz

"Origin of Wall Street’s Plunge Continues to Elude Officials
By GRAHAM BOWLEY

Officials from federal agencies hunted for clues amid a tangle of electronic trading records to find out what caused Thursday’s near panic on Wall Street..."

Basically, the NYT article from today says no one is sure what caused it, but it may simply be that all trading venues need the same set of "circuit breaker" rules. Nonetheless, Riversider has ALREADY decided, without a fraction of the facts, that its algos. Because his kneew jerk response is to jerk his knee.

http://www.nytimes.com/2010/05/08/business/08trading.html?ref=global

Please!
I think we'll find that the problem was exacerbated by the high frequency trading algorithms that account for what..50%+ of equity trading? There has not been much conviction by true buyers(we'll define that as accounts intending to hold stocks for more than a second,minute? The algorithms react to price and volume movements etc. Something clearly ran amok here.
This fat finger story sounds ridiculous.

it was definitely algo's hitting bids everywhere...this is the one situation where having the specialist in the picture would have stopped things. as soon as the market got so far out of whack, they would have halted trading in all the names that traded on the floor of the NYSE until they figured out what was going on. this would have avoided having to take trades off the tape at the end of the day.

We have proven that volume does not equal liquidity.

But my original point is that all algorithmic trading is not high speed. And not all high speed trading is algorithmic. And the problem apparently was not high speed trading per se - rather the lack of non-NYSE limits on high speed computer trading. Once again, Riversider goes for the ridiculous "ban it!" call without knowing even half the facts.

You are splitting hairs. Everyone knew but you that the title was referring to....

http://www.nytimes.com/2009/07/24/business/24trading.html?_r=1

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

For most of Wall Street’s history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.

But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.

“It’s become a technological arms race, and what separates winners and losers is how fast they can move,” said Joseph M. Mecane of NYSE Euronext, which operates the New York Stock Exchange. “Markets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.”

The rise of high-frequency trading helps explain why activity on the nation’s stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for a more than half of all trades. To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots earlier this month, and ended up handing spoils to lightning-fast computers.

It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

http://www.ft.com/cms/s/0/c1b46646-5a38-11df-acdc-00144feab49a.html

But "algo-trading", and the rise of so-called "high-frequency" traders that often use it, is so pervasive that some suspect it may be hard to see how ordinary investors can be expected to trust market structures in which they have placed their faith for decades. Instead, they seem to serve the interests of short-term traders using the latest computer wizardry.

More than half the US equity markets involve the use of a form of algorithmic or high-frequency trading. That is a huge increase since the 1987 stock market crash, where programme trades were blamed for exacerbating falls.

Moreover, trading takes place not only on the main exchanges - the New York Stock Exchange and Nasdaq - but on a plethora of other platforms, including "dark pools" and systems operated by brokers themselves. Less than 35 per cent of trading in NYSE-listed shares actually takes place on the New York Stock Exchange these days.

The speed of trades is mind-boggling. Last month Algo Technologies, a US company, unveiled a system that can handle a trade in 16 microseconds.

Stock exchanges are courting "algo" traders, eager to attract business away from rival platforms.

For most ordinary investors the idea of an exchange is still the neo-classical facade of the mighty NYSE on Wall Street. But in reality, most shares change hands in vast data centres. One of them, the size of three football fields, opened for business this week in Basildon, UK, built by NYSE Euronext, owner of the New York exchange.

Yet amid the technological revolution, it is unclear whether exchanges and brokers have the risk management systems to guard against algorithms running wild, perhaps triggered by "fat finger" trades.

Something else worries observers. The trader in Chicago shouting himself hoarse was quoting prices in S&P index futures, not ordinary shares, which often trade in a direct relationship with equities. That means a problem in the equity markets quickly becomes a problem elsewhere - raising the spectre of a systemic hit to the financial system.

http://www.youtube.com/watch?v=A_L9adtXdkE&feature=player_embedded#!

Marc Faber : basically what is happening is the following we have 70% of the trading volume that is algorithmic trading which is computer program driven , now most computer programs are structured according to momentum , in other words they are trends following models and they work like an auto pilot in a plane , so if there is pressure from the upside the auto pilot will push up the plane , if there is pressure from the right hand side the auto pilot will pressure it to the right and so forth ...to find an equilibrium point , and the auto pilot in the algorithmic trading they change at some point when you go through resistance or support levels , so then suddenly you go from long positions to net short and that then aggravates market moves , in other words yesterday as the markets opened they were still programmed on the buy side but when the market fell to a certain limit it all turned into sell orders that's why you got this big sell-off in one day ...in the 87 crash , we crashed by 21% in one day and from the peak in august 87 to the low on October 20th 1987 the market had dropped 40% , so very near term as of today on a daily basis we are over sold but we are still only moderately lower than we were at the peak on April 25th 2010 "

ban algo-trading, ban bonuses, banks are bad, ...

yo! enough with the proletariat propaganda B/S!!

We need free markets. The algo-traders are like pick-pockets in a bazaar. A free market does not mean no government, just a limited one that ensures a level playing field, and polices against fraud and deception.

http://wallstreet.blogs.fortune.cnn.com/2010/05/07/the-nyse-and-high-frequency-trading/
“What happened Thursday is much worse than the market makers walking away from their phones in 1987,” said Joe Saluzzi, who runs Themis Trading in Chatham, N.J., and has been a vocal foe of the rise of computerized trading. “When the sell orders came, the buyers disappeared. That’s a broken system.”

Saluzzi says regulators and policymakers must understand that the rise of automated trading – more than half of daily stock market volume is conducted using so-called high frequency trading strategies, according to a widely cited estimate from Tabb Group (see below for the full report) – is driving legitimate investors out of the market.

"But my original point is that all algorithmic trading is not high speed. And not all high speed trading is algorithmic"

Algo trading cannot be banned since it doesnt make any sense. Algo trading doesn't equal to automated trading, the basic of the computer - CPU has hundreds of algos in it. Lets ban all compuers, all digital devices and go back to the stone age.

High speed trading only works for firms like Goldman because the NYSE has negotiated preferential access to their networks. The low latency traders computers sit right next to the exchange and are able to see whats going on before an order is executed.

http://online.wsj.com/article/SB125167381855770865.html

Direct Edge, of Jersey City, N.J., is at the heart of the world of high-frequency trading, in which computerized models dash in and out of stocks by the millisecond, hoping to capture fleeting distortions between the prices of securities.

What has gotten the NYSE so upset is Direct Edge's advocacy of "flash trading" -- a particular variety of high-frequency trading that briefly previews some orders to a few dozen market participants and trading platforms in hopes of finding a match.

New York Sen. Charles Schumer last month said use of such orders "creates a two-tiered system where a privileged group of insiders receives preferential treatment," and he urged the SEC to ban them. In response, SEC Chairman Mary Schapiro has vowed to curb any "inequity" in such orders as part of a review of high-speed trading practices and "dark pools" operated by Wall Street firms and other traders.

Funny, here is an article that says the opposite - that HUMAN traders exaggerated the problem....

http://online.wsj.com/article/SB10001424052748704307804575234682245507858.html?mod=WSJ_hps_LEFTWhatsNews

Again, riversider speaks out of his ass before he knows the facts.

Alan: Is that Fran quote from "Social Studies"?

I think it's from her novel.

http://www.zerohedge.com/article/market-structure-and-after-hypocrisy-defined

http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
One of the big drivers of the equity volatility is the Fed's zero rate policy, which is forcing investors to search for yield in some very strange places. Once again, we call on our friends at the Federal Reserve Board to let interest rates slowly start to rise before this situation gets entirely out of hand -- again. As we said at the top of this comment, the banks are on the mend. Time to find out whether the US economy can grow with positive real interest rates.

Riversider, at first people are impressed with the barrage of your wiki links but your lack of knowledge is stunning.

"We need free markets. The algo-traders are like pick-pockets in a bazaar. A free market does not mean no government, just a limited one that ensures a level playing field, and polices against fraud and deception."

what makes the filed not level, the fact that they have computers and you don't? why not ban biotech companies' use of supercomputers?

exactly. We need a free market, which requires the government to ban all sorts of things and regulate heavily everything else. you know, exactly like Ayn Rand did NOT say...

I'll refine this, If the SEC removed the preferential access to trading enjoyed by the High Frequency Traders, then all would be basically OK. The only reason they control 70% of the volume is because the exchanges sold them OUR business.

without that mini collapses, where's the fun!!!???

what preferential treatment? please stop spewing zerohedge nonsense. name one thing they are allowed to do and you are not

They get to see order flow before execution.

through their highly sophisticated x-ray vision? or do they wear a tinfoil hat?

From wikipedial..

Flash trading is a controversial practice of some financial exchanges whereby certain customers are allowed to see incoming orders to buy or sell securities very slightly earlier than the general market participants, typically 30 milliseconds, in exchange for a fee. With this very slight advance notice of market conditions, traders with access to extremely powerful computers can conduct rapid statistical analysis of the changing market state and carry out high-frequency trading ahead of the public market.[1] "High frequency trading firms now account for 73% of all U.S. equity trades, although they represent only 2% of the approximately 20,000 firms in operation."[2]

Critics of the practice contend this creates a two-tiered market in which a certain class of traders can unfairly exploit others, akin to front running.[2] Exchanges claim that the procedure benefits all traders by creating more market liquidity and the opportunity for price improvement.

The practice was almost unknown by the general public until 2009, when the financial blog Zero Hedge began accusing Goldman Sachs of gaining unfair profits through the practice, which spread to mainstream financial media outlets by midyear.[3][4][5] Several U.S. exchanges voluntarily discontinued the practice in August 2009.[6][7] The Securities and Exchange Commission in September 2009 proposed banning the practice as part of regulatory reforms in the wake of the Financial crisis of 2007–2010.[8][9][10] As of May 2010[update], the proposals have not been implemented.[11

riversider, flashtrading (as you define it) was ostensibly banned by the SEC. There is a fair amount of reason to suggest it was not disruptive to the market or created an imputed unfair advantage, but I do agree that any suggestion of certain members receiving "flashes" of impending orders is unjust on its face.
Most of your other "analysis" on HFT is just empircally wrong or is derived from a bias of sources who clearly do not understand what they are talking about. You think the "old" specialist system on the floor of the exchanges was better? Now thats a joke. Frontrunning was an accepted practice, bid/ask spreads were far wider than they are today. Electronic trading has basically collapsed these imbedded profits at the exchanges to the benefit of John Q. Investor. C'mon, catch up dude.

Actually, I am not aware it was actually banned, only that a ban was proposed... by Chuck Schumer I recall.

" * MAY 11, 2010, 5:15 P.M. ET

Schapiro: No 'Single Cause' of Stock Dive Schapiro: No 'Single Cause' of Stock Dive

The SEC chairman said that regulators haven't yet found evidence of a "single cause" for the stock market's sudden plunge last week...."

http://online.wsj.com/article/SB10001424052748704250104575238070150681724.html?mod=WSJ_hps_LEFTWhatsNews

Still waiting for that retraction re: TOP from Riversider....

Right, and it was banned. Your other points on co-location and algos, etc. are mainly just noise. Ultimately, the SEC might get their panties in a bundle on co-location but we shall see. But guess who benefits from these arrangements - the mutual funds and broker-dealers and the schwabs of the world that are executing for the little guy. throw hedge funds in there too but to suggest these co-location arrangements allows frontrunning or provides access to quotes that otherwise not available to the general public is just actually inaccurate. and algos are used by basically everyone to the benefit of all market participants. its called technology. look, there may be some serious market structure issues that will come out of this when all is said and done but spewing nonsense doesn't help. the media basically has grossly mischaractorized HFT but its getting a bit better lately.

* factually inaccurate

http://www.stocktrading.com/HFT.htm

High frequency algorithmic systems have been programmed to step inside the NBBO (National Best Bid and Offer), and be the best bid and best offer. This puts the computer system at the front of the line to be first for execution, and gives the computer the best chance to capture the spread. Unfortunately, this practice is dominated by a few large firms, and they have driven traditional market makers out of the market. If a traditional market maker places a bid, the computer automatically steps in front. In some cases, it steps in front by as little as 1/100th of a penny (a practice called sub-pennying, which is discussed on my website http://www.defendtrading.com).

These programs are very predatory and step in front of the NBBO on a constant basis. This has driven liquidity providers out of the market. Our proprietary trading firm, Bright Trading LLC, in the early 2000s, used to account for 2% of the volume on the NYSE. Now we account for just a fraction of that. Our 400 traders used to provide a substantial amount of liquidity to the market. But due to predatory HFT market making practices, we now provide very little liquidity. We are now liquidity takers. The rational is simple, if we place a passive limit order (providing liquidity), the HFT algorithmic programs simply step in front of us. If we do get filled on a passive order, it is almost always because we are wrong. You are sub-pennied when you’re right, filled when you’re wrong. Hence, there is no point to us providing liquidity. Other proprietary trading firms, floor traders, and specialists are in the same boat. There is no way for them to compete with the algorithmic programs, so they don’t place passive orders.

riversider - consider your sources - that mindless vessel comment is an ouchie but your not helping yourself here.

You've not backed yourself up. If I'm wrong about flash trading so be it. But prove it. One article that the SEC ended the practice. A google of SEC bans flash trading only returns proposals to do such....

The SEC proposed a rule and the exchanges and ECN's that allowed such orders effectively banned them before the rule became final. You are lumping flash orders, algorithmic trading and high frequency trading into one bucket. Thats the danger of getting sucked into the vortex of misinformation on cuttiing and pasting your posts. Way off the mark. Terribly misinformed and then formulating a conclusion not based in fact. Your posts on this topic contradict your position, especially the last one from clearly a disinterested party. HFT took the spreads away from the traditional market-makers, specialists and other "liquidity providers"s. Cut into their margins in a big way and guess what, it is a good thing.

http://www.nasdaq.com/aspx/company-news-story.aspx?storyid=200908061930dowjonesdjonline000929

just rehashing zerohedge or saluzzi does not make you look informed on the topic. still waiting to hear how hft's are preferenced by exchanges. anybody can buy a computer and step in front of other people trades. you can try it in your fidelity account - it's fun.

the issue of source quality. not a new one. btw rs you've been quoting Evans-pritchard quite a bit these last few days. you do realize he is heavily in the deflation camp? or are you a source whore?

"anybody can buy a computer and step in front of other people trades. you can try it in your fidelity account - it's fun."

EXACTLY. Most trades done for RETAIL investors by Ameritrrade, Etrade, Schwab, etc, are in fact computer-driven high speed trades.

http://mindonmoney.wordpress.com/2010/05/13/matrix-market/

Ban mutual funds! Apperently a plain old mutual fund may have contributed to the crash.

Exclusive: Waddell is mystery trader in market plunge

http://www.reuters.com/article/idUSTRE64D42W20100514

Good thing Riversider already decided to ban something totally different!

Final nail in the coffin (and my appove post was 100% correct)

"High-Frequency Traders Seen Exonerated In Flash Crash Report"

From http://www.nasdaq.com/aspxcontent/newsstory.aspx?selected=CME&symbol=CME&textpath=20101001\ACQDJON201010011632DOWJONESDJONLINE000486.htm#ixzz118yIvtzo

See also:

"Waddell Shows Long-Term Fund Can Unhinge Wall Street...

...Waddell & Reed Financial Inc., the mutual-fund manager based in the heart of Kansas that caters to mom and pop investors, is an unlikely company to be blamed for sending Wall Street into a tailspin on May 6.

“They’re a long-term, buy-and-hold investor,” Geoff Bobroff, a fund-industry consultant in East Greenwich, Rhode Island, said in a telephone interview. “Their nature is not of an organization that is an active trader....‎"

http://www.businessweek.com/news/2010-10-01/waddell-shows-long-term-fund-can-unhinge-wall-street.html